The closure of inner city hospitals in favour of expanding regional services should be reversed, an NHS study has concluded. Health ministers will be told that the current funding formula is flawed.

The official study by the NHS executive says that social deprivation must be taken into account in allocating resources, giving inner cities a larger share of the NHS cake.

The effect is most dramatic in London, where the King's Fund yesterday calculated that instead of the capital being pounds 70m overprovided, it is in fact being short changed by pounds 200m - a calculation which critics will argue demolishes the case for the large-scale closure of London hospitals.

While the King's Fund figures are based on other published work, the still confidential NHS executive study is believed to reach broadly similar conclusions. Outside London it is understood to show that the big conurbations instead of losing about pounds 70m a year between them should be gaining an extra pounds 35m.

The report is so sensitive that it is understood that it will not be handed to health ministers until after the local elections on 5 May. One of those involved in the study said ministers could soften its detailed impact by adjusting the weighting given to factors within the new formula for NHS funding that it proposes.

The review of the formula has used 1991 census data to conclude that social deprivation needs to be taken into account in allocating NHS cash.

Yesterday's King's Fund report arguing that London is underfunded came as a blow to health ministers as the institute has been a key supporter of change in the capital. New evidence suggests that the Department of Health's figures estimating that London overspends by about pounds 70m were 'wrong', the institute said. 'There are now good reasons for believing that London merits a larger - not a smaller share - of the NHS cake.'

It still believed the balance between hospital and community-based care needed changing, the institute said, but 'new services must be put in place before old ones are declared redundant. To achieve sensible change without reducing health care for Londoners requires a substantial new investment of resources in the capital.'

The report came as Dr Brian Mawhinney, the health minister, launched a new drive to spread GP fund-holding further, saying he was clear that 'the interests of those patients not already covered will be best served by their GPs joining the scheme'.

He is considering legislation to create several levels of fund- holding - some taking money to buy more services such as maternity and emergency care, while others could take on fund-holding on a more limited level. He also announced a review of the costs of running fund-holding - saying its achievements 'must not be threatened by increases in the costs of bureaucracy'.